Given the potentially short life span of a career in athletics, it’s critical to understand the sporadic nature of cash flows and the resources available to athletes in order to strengthen and maintain their wealth.
Using a combination of time-segmented bucketing, balance-sheet optimization and liquidity–focused investing, a framework can be established for the newly minted athlete. This framework can then be used to leverage the unique cash-flow situations the athlete may face when making a career transition.
In many cases, the athlete’s need for funding may exist prior to his or her signing a contract. Before winning recognition by teams seeking potential candidates, for example, the athlete and his or her family may undertake extensive training and equipment costs.
Accordingly, the athlete must understand the path toward future earnings and consider the best source for pre-employment expenses. The support of family can be beneficial, of course, but may be unreliable.
Additionally, time-segmented bucketing requires understanding how to allocate each inflow of cash appropriately, given prior obligations, necessary daily expenses and long-term investing goals. Many professional sports leagues offer pension plans which, when combined with Social Security, fund the costs of late adulthood (age 62 and up).
With that in mind, an asset allocation based upon projected return assumptions in the long term, to supplement those income streams, is advised. Mixing that data with probability analysis can assist the athlete and his or her advisors in figuring out what current assets should be cast aside to maintain future lifestyle expenses.
Within the overall asset allocation, which should be dictated first by the amount of risk an athlete is comfortable with, each investment vehicle can then be further dissected to provide a unique purpose relative to the time frame of his or her financial goals.
Long-duration assets such as a player 401(k) can be allocated with far more short–term volatility risk, given the inability (without penalty) to withdraw those assets until age 59½. With liquidity of central importance for the accounts earmarked to provide daily expense assistance, these assets should be invested in areas with limited principal risk and high market liquidity so that reduction of principal does not occur due simply to a lack of interested buyers.
An athlete’s balance sheet comprises a snapshot of his or her current financial situation, ensuring that assets and liabilities in the near term match up appropriately. If debt was accrued through the use of loans or family obligations, determining a plan to remove that debt before making unnecessary expenditures will stabilize the balance sheet over time.
While income from marketing and endorsement opportunities can fluctuate, it is a good supplement for periods when the athlete has to consider whether near-term purchases may ultimately detract from long-term lifestyle maintenance.
At all levels of athletics, sponsorship opportunities via local businesses, product placement, autograph signings and personal appearances will all help maximize profitability in a short-career lifecycle. With a potential retirement lasting 30 or more years longer than that for traditional employment, athletes should always put short–term purchases into context and build a long-term financial plan that embeds the three core concepts discussed here.
Jeffrey S. Gerson and Shawn P. Landau are Financial Advisors with the Wealth Management division of Morgan Stanley in New York City. The views expressed herein are those of the authors and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member, SIPC, http://www.sipc.org. Morgan Stanley Financial Advisors engaged Worth to feature this article. Gerson and Landau may only transact business in states where they are registered or excluded or exempted from registration, http://www.morganstanleyfa.com/ggmgroup. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Gerson and Landau are not registered or excluded or exempt from registration. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S. CRC 1373778 12/15
This article was originally published in the February/March 2016 issue of Worth.